Mohnish Pabrai has issued the clarion call that the low rate of mortgage penetration in India coupled with high demand for housing makes HFC stocks a no-brainer investment. Mohnish’s theory is in line with the theory advocated by other experts and we have to act on it ASAP

Mohnish Pabrai’s USP is that he caters to the needs of the academicians as well as the practitioners.

He ensures that even answers to theoretical questions are interspersed with practical and real-life examples.

This makes it easier for novices to come to grips with complex investment theories.

Someone asked Mohnish how to balance growth and valuations.

Mohnish explained that there are businesses that are growing at such a scorching pace that there is no point in paying attention to their present valuations.

He cited the housing finance sector in India as a text-book example of this theory.

He pointed out that in India mortgages as a percentage of owned homes are extremely low. It used to be 3 or 4%. It is now 6%. In other emerging economies, it is 15 to 20%. In the US, it is upto 40%.

The corollary to this is that the percentage of homes in India that are financed is an extremely low number.

“As India rises, it is a no-brainer that people will want good housing and it is a no-brainer that they will have to finance it because there is no way that they can just buy it with their income levels,” Mohnish drawled.

“The housing finance sector will grow at 3 or 4 times GDP growth. So, if India is growing at 7%, the housing companies may be growing at 20 to 30%,” he added with a flourish.

Prof. Bruce Greenwald and the other eminent dignitaries in the audience sat erect in their chairs, startled at Mohnish’s revelation.

The concept of a business growing at upto 30% CAGR is simply unheard of in developed economies like the USA.

HFC Stocks are “Lakh crore ki kahani”

While Prof. Bruce Greenwald and the other dignitaries may have been baffled by Mohnish’s analysis, it did not come as a surprise to us.

We are already familiar with the great potential of housing finance stocks.

Basant Maheshwari was the first to home in on the sector. He boldly called them “blind buys”.

“A blind buy in this situation would be non-banking finance companies – NBFCs specifically relating to the housing finance sector …. those kinds of companies you can just buy them and keep them,” Basant had said as far back as in June 2015, displaying amazing clairvoyance.

Basant’s theory is endorsed by Vijay Kedia.

“In my view, ‘Housing Finance’ sector could be the next market leader,” he said in his customary cheerful manner.

“I am very bullish on the housing sector …. among housing finance companies, LIC is cheaper than its peers …. It may not be a multi bagger but I think that it should give me a 20-25 per cent return every year,” he added.

Raamdeo Agarwal also jumped into the fray and described housing finance stocks as “Lakh crore ki kahani”, implying that they would generate humongous wealth for investors.

The Badshah pointed out that he pounced on the stock without a second’s thought when he realized that it was quoting at dirt-cheap valuations.

“Such ridiculous valuations!!! … What is there to think? So those kind of situations are like invest now, investigate later … it is like meeting Aishwarya Rai, what are you thinking!! You date her without thinking” the Badshah had exclaimed, much to the amusement of Ramesh Damani and N. Jayakumar who were grilling him.

Since then, DHFL has rewarded the Badshah with enormous gains.

According to the latest research report by Angel Broking, DHFL is an excellent buy because its asset quality is intact even though the loan book has surged.

The other HFC stocks that are ripe for the picking include Repco Home Finance, SRG Housing Finance, LIC Housing Finance, IndiaBulls Housing Finance etc.

Conclusion

Mohnish Pabrai’s theory with regard to the demand for housing means that even home improvement stocks like Cera Sanitaryware, Kajaria Ceramics, etc will also do well. So, if we prepare a portfolio of HFC and home improvement stocks and sit tight on them, we can be assured of raking in humungous gains!

13 Comments

i do not understand the all logic behind this. may be i m novice. but my question is that larger percentage of home finance remains with banks and is expected to remain with them. though there might be hassles but still people specially salaried class prefer banks and their interest rate is much cheaper. i have this experience that even if it takes time to process housing loan, people prefer banks.

Banks finance to commercial and retail and shri segments. Usually retail portfolio consists of around 40 to 50%. Within this home loan portfolio share may be say 30 to 40%. Then the profits of Banks are not only interest I income but s sizeable share of fee income and cross selling income also.

Whereas for HFCs, entire income us generated from home loan portfolio.

In that sense any shift in demand would first impact HFCs more than Banks.

Consumer centric companies( like fmcg, retail, paints, logistics, auto, pvt financials which includes pvt banks, housing finance companies, nbfc and insurance) is The Only Theme which will work for Next few years irrespective of any global geo political or domestic political situations except in War Situations (then physical Gold will work),

It’s overshadowed by perception about Anil Ambani. It’s a good stock and is run by Anmol Ambani who has to change the perception to clean management and focussed on financial services business.Once market treats this differently from other ADAG companies, it will get rerated

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